The Difference Between Prepaid Items and Closing Costs

As real estate professionals, we understand all of the fees which are a part of a home transaction. But first-time buyers have never been through this experience before, and need guidance while navigating their first home transaction. Making sure clients understand how much buying a home will really cost them, especially up front, will help them feel confident and comfortable during the purchase. Explain to them the difference between prepaid items and closing costs.

Closing Costs

Closing costs are fees paid in return for the services of all who were involved in the homebuying process. These include fees assigned by lenders, appraisers, title companies and governments. In short, closing costs are the fees incurred as a result of getting a home loan. Closing costs are generally the responsibility of the buyer. Oftentimes, however, closing costs are divided between the buyer and the Seller while negotiating the final home price.

Prepaid Items

Depending on the home, the prepaid items could be a generous chunk of money which buyers need to be aware of. Prepaid items are essentially a service to the buyer by the lender. The lender collects funds including, but not limited to, property taxes and hazard insurance premiums which are deposited into an escrow account with the lender. These funds also include mortgage interest accrued from the closing date through the end of that month. Since the date of closing can vary, so can the amount of funds needed. Prepaid items are only costs that would have been due whether the home was sold or not. Prepaid items would be the same amount no matter which lender, realtor or title/escrow company used.

Cash to Close

Cash to close is a combination of purchase price, closing costs and prepaid items minus the loan amount, earnest money and any credits that the seller may have agreed to in the sales agreement. It is paid by either wire fund, or a cashier's check made out to the escrow company.

You Don't Know What You Don't Know

It's true; you don't know if you don't know. We can often forget that not everyone knows what we do, or understands what it takes to close on a home. Great customer service to our clients means that we lay out exactly what is required of them and what they can do about it. It is easy for most people to get overwhelmed when first seeing the cost breakdown for a mortgage loan. Assisting your customers by breaking down the costs of homebuying, prepaid items and closing costs individually can help them understand and feel comfortable in their decision.

If you or your customers have questions about closing costs, please don't hesitate to contact us!